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Question;FINAL EXAM MGT 5002;MULTIPLE CHOICE CHAPTER 9;(9-5) Required return;1). If in the;opinion of a given investor a stock?s expected return exceeds its;required return, this suggests that the investor thinks;a. the stock is;experiencing supernormal growth.;b. the stock should be;sold.;c. the stock is a good buy.;d. management is probably;not trying to maximize the price per share.;e. dividends are not likely;to be declared.;(9-1) Preemptive right;2). The preemptive;right is important to shareholders;because it;a. allows managers to buy additional shares below the current market;price.;b. will result in higher;dividends per share.;c. is included in every;corporate charter.;d. protects the current;shareholders against a dilution of their ownership interests.;e. protects bondholders;and thus enables the firm to issue debt with a relatively low interest rate.;(9-2) Classified stock;3). Companies can;issue different classes of common stock.;Which of the following statements concerning stock classes is CORRECT?;a. All common stocks fall into one;of three classes: A, B, and C.;b. All common stocks, regardless of class, must have the same voting;rights.;c. All firms have several classes;of common stock.;d. All common stock, regardless of class, must pay the same dividend.;e. Some class or classes of common;stock are entitled to more votes per share than other classes.;(9-5) Constant growth;model;4). If a stock?s;dividend is expected to grow at a;constant rate of 5% a year, which of the following statements is CORRECT? The;stock is in equilibrium.;a. The expected return on the stock is 5% a year.;b. The stock?s dividend yield;is 5%.;c. The price of the stock is expected to decline in the future.;d. The stock?s required return;must be equal to or less than 5%.;e. The stock?s price one year;from now is expected to be 5% above the current price.;(9-7) Corporate valuation;model;5). Which of the;following statements is CORRECT?;a. To implement the corporate valuation model, we discount projected;free cash flows at the weighted;average cost of capital.;b. To implement the corporate valuation model, we discount net;operating profit after taxes (NOPAT) at the weighted average cost of capital.;c. To implement the corporate valuation model, we discount projected;net income at the weighted average cost of capital.;d. To implement the corporate valuation model, we discount projected;free cash flows at the cost of equity capital.;e. The corporate valuation;model requires the assumption of a constant growth rate in all years.;(9-8) Preferred stock;concepts;6). Which of the;following statements is CORRECT?;a. A major disadvantage of financing with preferred stock is that;preferred stockholders typically have supernormal voting rights.;b. Preferred stock is normally expected to provide steadier, more;reliable income to investors than the;same firm?s common stock, and, as a result, the expected after-tax yield on the;preferred is lower than the after-tax expected return on the common stock.;c. The preemptive right is;a provision in all corporate charters that gives preferred stockholders the;right to purchase (on a pro rata basis) new issues of preferred stock.;d. One of the disadvantages to a corporation of owning preferred;stock is that 70% of the dividends received represent taxable income to the;corporate recipient, whereas interest income earned on bonds would be tax free.;e. One of the advantages to financing with preferred stock is that;70% of the dividends paid out are tax deductible to the issuer.;(9-5) Expected total return;7). If D1;= $1.25, g (which is constant) =;5.5%, and P0 = $44, what is the stock?s expected total return for;the coming year?;a. 7.54%;b. 7.73%;c. 7.93%;d. 8.13%;e. 8.34%;Chapter 10 - Multiple Choice;(10-6) Internal vs.;external common;8). Bankston;Corporation forecasts that if all of its existing financial policies are;followed, its proposed capital budget would be so large that it would have to;issue new common stock. Since new stock;has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new;common stock?;a. Increase the dividend payout;ratio for the upcoming year.;b. Increase the percentage of;debt in the target capital structure.;c. Increase the proposed capital;budget.;d. Reduce the amount of short-term;bank debt in order to increase the current ratio.;e. Reduce the percentage of debt in the target capital structure.;(10-5) Cost of equity;CAPM;9). When working;with the CAPM, which of the following;factors can be determined with the most precision?;a. The market risk premium;(RPM).;b. The beta coefficient, bi;of a relatively safe stock.;c. The most appropriate;risk-free rate, rRF.;d. The expected rate of;return on the market, rM.;e. The beta coefficient of ?the;market,? which is the same as the beta of an average stock.;(10-9) Risk and projects;10). LaPango Inc.;estimates that its average-risk projects have a WACC of 10%, its below-average;risk projects have a WACC of 8%, and its above-average risk projects have a;WACC of 12%. Which of the following;projects (A, B, and C) should the company accept?;a. Project B, which is of below-average risk and has a return of;8.5%.;b. Project C, which is of above-average risk and has a return of 11%.;c. Project A, which is of average risk and has a return of 9%.;d. None of the projects;should be accepted.;e. All of the projects;should be accepted.;(10-5) Cost of RE: CAPM;11). O'Brien Inc. has;the following data: rRF =;5.00%, RPM = 6.00%, and b = 1.05.;What is the firm's cost of equity from retained earnings based on the;CAPM?;a. 11.30%;b. 11.64%;c. 11.99%;d. 12.35%;e. 12.72%;(10-5) Cost of RE: CAPM;12). Scanlon Inc.'s;CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%, RPM =;5.25%, and b = 1.30. Based on the CAPM;approach, what is the cost of equity from retained earnings?;a. 9.67%;b. 9.97%;c. 10.28%;d. 10.60%;e. 10.93%;(10-5);Bond-yield-plus-risk premium;13). A. Butcher Timber;Company hired your consulting firm to help them estimate the cost of;equity. The yield on the firm's bonds is;8.75%, and your firm's economists believe that the cost of equity can be;estimated using a risk premium of 3.85% over a firm's own cost of debt. What is an estimate of the firm's cost of;equity from retained earnings?;a. 12.60%;b. 13.10%;c. 13.63%;d. 14.17%;e. 14.74%;(10-7) WACC;14). You were hired as;a consultant to Giambono Company, whose target capital structure is 40% debt;15% preferred, and 45% common equity.;The after-tax cost of debt is;6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is;12.75%. The firm will not be issuing any;new stock. What is its WACC?;a. 8.98%;b. 9.26%;c. 9.54%;d. 9.83%;e. 10.12%;(Comp.) Cost of capital concepts;15). Which of the;following statements is CORRECT?;a. Since debt capital can cause a company to go bankrupt but equity;capital cannot, debt is riskier than equity, and thus the after-tax cost of;debt is always greater than the cost of equity.;b. The tax-adjusted cost of debt is always greater than the interest;rate on debt, provided the company does in fact pay taxes.;c. If a company assigns the same cost of capital to all of its;projects regardless of each project?s;risk, then the company is likely to reject some safe projects that it actually;should accept and to accept some risky projects that it should reject.;d. Because no flotation;costs are required to obtain capital as retained earnings, the cost of retained;earnings is generally lower than the after-tax cost of debt.;e. Higher flotation costs tend to reduce the cost of;equity capital.;(Comp.) Capital;components;16). Which of the;following statements is CORRECT?;a. The component cost of preferred;stock is expressed as rp(1 - T).;This follows because preferred stock dividends are treated as fixed charges;and as such they can be deducted by the issuer for tax purposes.;b. A cost should be assigned to retained;earnings due to the opportunity cost principle, which refers to the fact that;the firm?s stockholders would themselves expect to earn a return on earnings;that were paid out rather than retained and reinvested.;c. No cost should be assigned to retained;earnings because the firm does not have to pay anything to raise them. They are generated as cash flows by operating;assets that were raised in the past, hence they are ?free.?;d. Suppose a firm has been losing money and thus is not paying taxes;and this situation is expected to persist into the foreseeable future. In this case, the firm?s before-tax and;after-tax costs of debt for purposes of calculating the WACC will both be equal;to the interest rate on the firm?s currently outstanding debt, provided that;debt was issued during the past 5 years.;e. If a firm has enough retained earnings;to fund its capital budget for the coming year, then there is no need to;estimate either a cost of equity or a WACC.;Chapter 11 - Multiple Choice;(11-2) NPV;17). Which of the;following statements is CORRECT? Assume;that the project being considered has normal cash flows, with one outflow;followed by a series of inflows.;a. A project?s NPV is found by compounding the cash inflows at the;IRR to find the terminal value (TV), then discounting the TV at the WACC.;b. The lower the WACC used to calculate it, the lower the calculated;NPV will be.;c. If a project?s NPV is less than zero, then its IRR must be less;than the WACC.;d. If a project?s NPV is greater than zero, then its IRR must be less;than zero.;e. The NPV of a relatively low-risk project should be found using a;relatively high WACC.;(11-3) IRR;18). Which of the;following statements is CORRECT?;a. One defect of the IRR method is that it does not take account of;cash flows over a project?s full life.;b. One defect of the IRR method is that it does not take account of;the time value of money.;c. One defect of the IRR method is that it does not take account of;the cost of capital.;d. One defect of the IRR method is that it values a dollar received;today the same as a dollar that will not be received until sometime in the;future.;e. One defect of the IRR method is that it assumes that the cash;flows to be received from a project can be reinvested at the IRR itself, and;that assumption is often not valid.;(11-8) Payback;19). Which of the;following statements is CORRECT? Assume;that the project being considered has normal cash flows, with one outflow;followed by a series of inflows.;a. The longer a project?s payback period, the more desirable the;project is normally considered to be by this criterion.;b. One drawback of the payback criterion for evaluating projects is;that this method does not properly account for the time value of money.;c. If a project?s payback is positive, then the project should be;rejected because it must have a negative NPV.;d. The regular payback ignores cash flows beyond the payback period;but the discounted payback method overcomes this problem.;e. If a company uses the same payback requirement to evaluate;all projects, say it requires a;payback of 4 years or less, then the;company will tend to reject projects;(11-5) NPV and IRR;20). Which of the;following statements is CORRECT?;a. The NPV method assumes that cash flows will be reinvested at the;WACC, while the IRR method assumes reinvestment at the IRR.;b. The NPV method assumes that cash flows will be reinvested at the;risk-free rate, while the IRR method assumes reinvestment at the IRR.;c. The NPV method assumes that cash flows will be reinvested at the;WACC, while the IRR method assumes reinvestment at the risk-free rate.;d. The NPV method does not consider all relevant cash flows;particularly cash flows beyond the payback period.;e. The IRR method does not consider all relevant cash flows;particularly cash flows beyond the payback period.;(Comp.) Miscellaneous;concepts;21). Which of the;following statements is CORRECT?;a. The IRR method appeals to some managers because it gives an;estimate of the rate of return on projects rather than a dollar amount, which;the NPV method provides.;b. The discounted payback method eliminates all of the problems;associated with the payback method.;c. When evaluating independent projects, the NPV and IRR methods;often yield conflicting results regarding a project's acceptability.;d. To find the MIRR, we discount the TV at the IRR.;e. A project?s NPV profile must intersect the X-axis at the project?s;WACC.;(11-7) NPV profiles;22). Which of the following;statements is CORRECT? Assume that all;projects being considered have normal cash flows and are equally risky.;a. If a project?s IRR is equal to its WACC, then, under all;reasonable conditions, the project?s NPV must be negative.;b. If a project?s IRR is equal to its WACC, then under all reasonable;conditions, the project?s IRR must be negative.;c. If a project?s IRR is equal to its WACC, then under all reasonable;conditions the project?s NPV must be zero.;d. There is no necessary relationship between a project?s IRR, its;WACC, and its NPV.;e. When evaluating mutually exclusive projects, those projects with;relatively long lives will tend to have relatively high NPVs when the cost of;capital is relatively high.;Chapter 12 Multiple;choice;(12-1) Sunk costs;23). Which of the;following statements is CORRECT?;a. A sunk cost is any cost that must be expended in order to complete;a project and bring it into operation.;b. A sunk cost is any cost that was expended in the past but can be;recovered if the firm decides not to go forward with the project.;c. A sunk cost is a cost that was incurred and expensed in the past;and cannot be recovered if the firm decides not to go forward with the project.;d. Sunk costs were formerly hard to deal with, but once the NPV;method came into wide use, it became possible to simply include sunk costs in;the cash flows and then calculate the project?s NPV.;e. A good example of a sunk cost is a situation where Home Depot;opens a new store, and that leads to a decline in sales of one of the firm?s;existing stores.;(12-1) Relevant cash;flows;24). Which of the;following factors should be included in the cash flows used to estimate;a project?s NPV?;a. All costs associated with the project that have been incurred;prior to the time the analysis is being conducted.;b. Interest on funds borrowed to help finance the project.;c. The end-of-project recovery of any additional net operating working;capital required to operate the project.;d. Cannibalization effects, but only if those effects increase the;project?s projected cash flows.;e. Expenditures to date on research and development related to the;project, provided those costs have already been expensed for tax purposes.;(12-1) Incremental cash;flows;25). Which one of the;following would NOT;result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new;product?;a. A firm has a parcel of land that can be used for a new plant site;or be sold, rented, or used for agricultural purposes.;b. A new product will generate new sales, but some of those new sales;will be from customers who switch from one of the firm?s current products.;c. A firm must obtain new equipment for the project, and $1 million;is required for shipping and installing the new machinery.;d. A firm has spent $2 million on research and development associated;with a new product. These costs have;been expensed for tax purposes, and they cannot be recovered regardless of;whether the new project is accepted or rejected.;e. A firm can produce a new product, and the existence of that;product will stimulate sales of some of the firm?s other products.;(12-4) Risk analysis;26). Taussig;Technologies is considering two potential projects, X and Y. In assessing the projects? risks, the company;estimated the beta of each project versus both the company?s other assets and;the stock market, and it also conducted thorough scenario and simulation;analyses. This research produced the;following data;Project X;Project Y;Expected NPV;$350,000;$350,000;Standard deviation (?NPV);$100,000;$150,000;Project beta (vs. market);1.4;0.8;Correlation of the;project cash flows with;cash flows from currently;existing projects;Cash flows are not correlated with the;cash flows from;existing projects;Cash flows are highly;correlated with the;cash flows from;existing projects;Which of the following;statements is CORRECT?;a. Project X has more stand-alone risk than Project Y.;b. Project X has more corporate (or within-firm) risk than;Project Y.;c. Project X has more market risk than Project Y.;d. Project X has the same level of corporate risk as Project Y.;e. Project X has the same market risk as Project Y since its cash;flows are not correlated with the cash flows of existing projects.;(12-4) Project's effect;on firm risk;27). A firm is;considering a new project whose risk is greater than the risk of the firm?s;average project, based on all methods for assessing risk. In evaluating this project, it would be;reasonable for management to do which of the following?;a. Increase the estimated IRR of the project to reflect its greater;risk.;b. Increase the estimated NPV of the project to reflect its greater;risk.;c. Reject the project, since its acceptance would increase the firm?s;risk.;d. Ignore the risk differential if the project would amount to only a;small fraction of the firm?s total assets.;e. Increase the cost of;capital used to evaluate the project to reflect its higher-than-average risk.;(12-2) Annual CF;28). As assistant to;the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project;with the following data. What is the;Year 1 cash flow?;Sales revenues $13,000;Depreciation $4,000;Other operating costs $6,000;Tax rate 35.0%;a. $5,950;b. $6,099;c. $6,251;d. $6,407;e. $6,568;Chapter 13 - Multiple Choice;(13-5) Flexibility option;29). Which one of the;following is an example of a ?flexibility? option?;a. A company has an option to invest in a project today or to wait;for a year before making the commitment.;b. A company has an option to close down an operation if it turns out;to be unprofitable.;c. A company agrees to pay more to build a plant in order to be able;to change the plant's inputs and/or outputs at a later date if conditions;change.;d. A company invests in a project today to gain knowledge that may;enable it to expand into different markets at a later date.;e. A company invests in a jet aircraft so that its CEO, who must;travel frequently, can arrive for distant meetings feeling less tired than if;he had to fly a commercial airline.;(13-6) Risk and project;selection;30). Langston Labs has;an overall (composite) WACC of 10%, which reflects the cost of capital for its;average asset. Its assets vary widely in;risk, and Langston evaluates low-risk projects with a WACC of 8%, average-risk;projects at 10%, and high-risk projects at 12%.;The company is considering the following projects;Project Risk Expected Return;A High 15%;B Average 12%;C High 11%;D Low 9%;E Low 6%;Which set of projects;would maximize shareholder wealth?;a. A and B.;b. A, B, and C.;c. A, B, and D.;d. A, B, C, and D.;e. A, B, C, D, and E.;(Comp.) Real options;31). Which one;of the following will NOT;increase the value of a real option?;a. Lengthening the time during which a real option must be exercised.;b. An increase in the volatility of the underlying source of risk.;c. An increase in the risk-free rate.;d. An increase in the cost of obtaining the real option.;e. A decrease in the probability that a competitor will enter the;market of the project in question.;(Comp.) Real options;32). Gleason Research;regularly takes real options into account when evaluating its proposed;projects. Specifically, it considers the;option to abandon a project whenever it turns out to be unsuccessful (the;abandonment option), and it evaluates whether it is better to invest in a;project today or to wait and collect more information (the investment timing;option). Assume the proposed projects;can be abandoned at any time without penalty.;Which of the following statements is CORRECT?;a. The abandonment option tends to reduce a project's NPV.;b. The abandonment option tends to reduce a project's risk.;c. If there are important first-mover advantages, this tends to;increase the value of waiting a year to collect more information before;proceeding with a proposed project.;d. A project can either have an abandonment option or an investment;timing option, but never both.;e. Investment timing options always increase the value of a project.;(13-2) Growth option: NPV;33). Tutor.com is;considering a plan to develop an online finance tutoring package that has the;cost and revenue projections shown below.;One of Tutor's larger competitors, Online Professor (OP), is expected to;do one of two things in Year 5: (1);develop its own competing program, which will put Tutor's program out of;business, or (2) offer to buy Tutor's program if it decides that this would be;less expensive than developing its own program.;Tutor thinks there is a 35% probability that its program will be;purchased for $6 million and a 65% probability that it won't be bought, and;thus the program will simply be closed down with no salvage value. What is the estimated net present value of;the project (in thousands) at a WACC = 10%, giving consideration to the;potential future purchase?;WACC = 10.0% 0 1 2 3 4 5;Original project: -$3,000 $500 $500 $500 $500 $500;Future Prob.;Buys 35% $6,000;Doesn't buy 65% $0;a. $161.46;b. $179.40;c. $199.33;d. $219.26;e. $241.19;Chapter 14 - Multiple Choice;(14-2) Business risk;34). An increase in;the debt ratio will generally have no effect on which of these items?;a. Business risk.;b. Total risk.;c. Financial risk.;d. Market risk.;e. The firm's beta.;(14-3) Optimal capital;structure;35). Based on the;information below, what is the firm's optimal capital structure?;a. Debt = 40%, Equity = 60%, EPS = $2.95, Stock price = $26.50.;b. Debt = 50%, Equity = 50%, EPS = $3.05, Stock price = $28.90.;c. Debt = 60%, Equity = 40%, EPS = $3.18, Stock price = $31.20.;d. Debt = 80%, Equity = 20%, EPS = $3.42, Stock price = $30.40.;e. Debt = 70%, Equity = 30%, EPS = $3.31, Stock price = $30.00.;(14-5) Leverage and cap.;struct.;36). Which of the;following events is likely to encourage a company to raise its target debt;ratio, other things held constant?;a. An increase in the corporate tax rate.;b. An increase in the personal tax rate.;c. An increase in the company?s operating leverage.;d. The Federal Reserve tightens interest rates in an effort to fight;inflation.;e. The company's stock price hits a new high.;(14-3) Target capital;structure;37). The firm?s target;capital structure should do which of the following?;a. Maximize the earnings per share (EPS).;b. Minimize the cost of debt (rd).;c. Obtain the highest possible bond rating.;d. Minimize the cost of equity (rs).;e. Minimize the weighted average cost of capital (WACC).;(14-5) Leverage and cap. struct.;38). Which of the;following statements is CORRECT, holding other things constant?;a. Firms whose assets are relatively liquid tend to have relatively;low bankruptcy costs, hence they tend to use relatively little debt.;b. An increase in the personal tax rate is likely to increase the;debt ratio of the average corporation.;c. If changes in the bankruptcy code make bankruptcy less costly to;corporations, then this would likely lead to lower debt ratios for;corporations.;d. An increase in the company?s degree of operating leverage would;tend to encourage the firm to use more debt in its capital structure so as to;keep its total risk unchanged.;e. An increase in the corporate tax rate would in theory encourage;companies to use more debt in their capital structures.;(14-2) Capital struct.;concepts;39). Which of the;following statements is CORRECT?;a. In general, a firm with low operating leverage also has a small;proportion of its total costs in the form of fixed costs.;b. There is no reason to think that changes in the personal tax rate;would affect firms? capital structure decisions.;c. A firm with a relatively high business risk is more likely to;increase its use of financial leverage than a firm with low business risk;assuming all else equal.;d. If a firm's after-tax cost of equity exceeds its after-tax cost of;debt, it can always reduce its WACC by increasing its use of debt.;e. Suppose a firm has less than its optimal amount of debt. Increasing its use of debt to the point where;it is at its optimal capital structure will decrease the costs of both debt and;equity.;(14-2) Break-even;analysis;40). Longstreet Inc.;has fixed operating costs of $470,000, variable costs of $2.80 per unit;produced, and its product sells for $4.00 per unit. What is the company's break-even point, i.e.;at what unit sales volume would income equal costs?;a. 391,667;b. 411,250;c. 431,813;d. 453,403;e. 476,073;(14-2) Break-even;analysis;41). Southwest U's;campus book store sells course packs for $15 each, the variable cost per pack;is $9, fixed costs to produce the packs are $200,000, and expected annual sales;are 50,000 packs. What are the pre-tax;profits from sales of course packs?;a. $ 72,900;b. $ 81,000;c. $ 90,000;d. $100,000;e. $110,000;(14-2) Break-even;analysis;42). Your uncle is;considering investing in a new company that will produce high quality stereo;speakers. The sales price would be set;at 1.5 times the variable cost per unit, the variable cost per unit is;estimated to be $75.00, and fixed costs are estimated at $1,200,000. What sales volume would be required to break;even, i.e., to have EBIT = zero?;a. 28,880;b. 30,400;c. 32,000;d. 33,600;e. 35,280;Chapter 15 - Multiple Choice;(15-3) Dividend payout;43). In the real;world, dividends;a. are usually more stable than earnings.;b. fluctuate more widely than earnings.;c. tend to be a lower percentage of earnings for mature firms.;d. are usually changed every year to reflect earnings changes, and;these changes are randomly higher to lower, depending on whether earnings;increased or decreased.;e. are usually set as a fixed percentage of earnings, e.g., at 40% of;earnings, so if EPS = $2.00, then DPS would equal $0.80. Once the percentage is set, then dividend;policy is on ?automatic pilot? and the dividend actually paid depends strictly;on earnings.;(15-6) Stock split;44). You own 100;shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1;stock split. Which of the following best;describes your likely position after the split?;a. You will have 200 shares of stock, and the stock will trade at or;near $120 a share.;b. You will have 200 shares of stock, and the stock will trade at or;near $60 a share.;c. You will have 100 shares of stock, and the stock will trade at or;near $60 a share.;d. You will have 50 shares of stock, and the stock will trade at or;near $120 a share.;e. You will have 50 shares of stock, and the stock will trade at or;near $600 a share.;(15-1) Investors' div.;preferences;45). Myron Gordon and;John Lintner believe that the required return on equity increases as the;dividend payout ratio is lowered. Their;argument is based on the assumption that;a. investors are indifferent between dividends and capital gains.;b. investors require that the dividend yield plus the capital gains;yield equal a constant.;c. capital gains are taxed at a higher rate than dividends.;d. investors view dividends as being less risky than potential future;capital gains.;e. investors prefer a dollar of expected capital gains to a dollar of;expected dividends because of the lower tax rate on capital gains.;(15-5) Factors in div.;policy;46). Which of the;following would be most likely to lead to a decrease in a firm's;dividend payout ratio?;a. Its earnings become more stable.;b. Its access to the capital markets increases.;c. Its research and development efforts pay off, and it now has more;high-return investment opportunities.;d. Its accounts receivable decrease due to a change in its credit;policy.;e. Its stock price has increased over the last year by a greater;percentage than the increase in the broad stock market averages.;(Comp.) Dividend theories;47). Which of the;following statements about dividend policies is CORRECT?;a. Miller and Modigliani argued that investors prefer dividends to;capital gains because dividends are more certain than capital gains. They call this the ?bird-in-the-hand? effect.;b. One reason that companies tend to favor distributing excess cash;as dividends rather than by repurchasing stock is that dividends are normally;taxed at a lower rate than gains on repurchased stock.;c. One advantage of dividend reinvestment plans is that they allow;shareholders to delay paying taxes on the dividends that they choose to reinvest.;d. One key advantage of the residual dividend model is that it;enables a company to follow a stable dividend policy.;e. The clientele effect suggests that companies should follow a;stable dividend policy.;(Comp.) Repurchases and;DRIPS;48). Which of the;following statements is CORRECT?;a. One disadvantage of dividend reinvestment plans is that they;increase transactions costs for investors who want to increase their investment;in the company.;b. One advantage of dividend reinvestment plans is that they enable;investors to postpone paying taxes on the dividends credited to their account.;c. Stock repurchases can be used by a firm that wants to increase its;debt ratio.;d. Stock repurchases make sense if a company expects to have a lot of;profitable new projects to fund over the next few years, provided investors are;aware of these investment opportunities.;e. One advantage of an open market dividend reinvestment plan is that;it provides new equity capital and increases the shares outstanding.;(Comp.) Div. policy and;repurchases;49). Which of the;following statements is CORRECT?;a. Historically, the tax code has encouraged companies to pay;dividends rather than retain earnings.;b. If a company uses the residual dividend model to determine its dividend;payments, dividend payout will tend to increase whenever its profitable;investment opportunities increase relatively rapidly.;c. The more a firm's management believes in the clientele effect, the;more likely the firm is to adhere strictly to the residual dividend model.;d. Large stock repurchases financed by debt tend to increase expected;earnings per share, but they also tend to increase the firm's financial risk.;e. A dollar paid out to;repurchase stock has the same tax benefit as a dollar paid out in;dividends. Thus, both companies and;investors should be indifferent between distributing cash through dividends and;stock repurchase programs.;(15-6) Stock split;50). Mid-State;BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stock sold for $80;per share. If the firm's total market;value is unchanged by the split, what will the stock price be following the;split?;a. $20.63;b. $21.71;c. $22.86;d. $24.00;e. $25.20

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